'Neutral' On Carnival Until Demand Damage Clears: Analyst

Jennifer Leigh Parker|Writer, CNBC.com

Published 1:19 PM ET Tue, 17 Jan 2012
CNBC.com

Wall Street is speculating on the impact ofthe Costa Concordia disaster on Carnival.

More than legal liabilites, or one-time clean-up costs, the real threat to the cruise company — and to the broader industry — is a drop in demand, argues Susquehanna gaming and leisure analyst Rachael Rothman.

"The real question is how people view cruising going forward. Does this overhang demand, which will set 2012?" she said.

Thus far, the Street's answer is yes. Morgan Stanley , JPMorgan Chase , and Susquehanna each downgraded their estimates for Carnival through 2012 and 2013. The stock subsequently posted a near 14 percent drop in midday trading.

"Cruise booking kicked off last week with 'wave season,' which traditionally accounts for about 35 percent of all booking for the year. That's a difficult challenge to overcome," says Rothman.

A hit to demand season for a seasonal industry does not bode well, but there's no clear sign yet of how prices will change.

"You need a significant amount of call-volume data to see what amount of discount will work. 10 percent? 30 percent? At what point does demand convert into a reservation?" Rothman asks.

In the aftermath of the damage, it may be difficult for cruise companies to match price with demand.

"Linear programming [price point] models don't work well in periods of exogenous shock or dislocation, and that could be anything from September 11th or the global financial crisis. You need post-crisis data for it to work," she says, adding, "It could be seven to 10 days before we see more clarity in pricing."

"Demand does come back; it just takes time — which is why we went to 'neutral.'"

The company, expected to release its 10k filing within the next two weeks, will soon shed more light on the legal costs of the accident. The ship was carrying approximately 2.5 thousand tons of fuel.

According to Reuters' latest reports, the death toll has risen to 11, leaving 24 people unaccounted for four days after the giant cruiser carrying more than 4,200 passengers and crew crashed off the coast of Tuscany.